Despite all the market-friendly US political headlines hitting the wires early in Asia, the collapse in oil prices saw WTI plunge as the market continues to probe for a bottom amid oversupply concerns.
Besides the obvious momentum play that is unfolding from a technical perspective, the slide exacerbated when OPEC members made light of the chance of expanding production cuts at the May 25 open summit. With open interest topping near record highs, WTI plummeted from $47.60 region to near $45.20 alarmingly close to the core psychologically $45.00 level which if broken could send the oil pits into complete disarray and will likely have far-reaching consequences for both equity and currency markets near term.
Oil’s slide overnight has driven energy sector stocks lower, over 2% weighing on the broader Indices. And the USD moved lower on risk aversion play (JPY) but gained on Petro currencies. This morning’s focus has shifted to the negative commodity narrative from the positive FOMC dynamic.
On the political front, the passage of President Trump’s healthcare reform was met with little market fanfare as dealers now await the knock down drag ‘em out battle that will likely unfold as the bill moves to the Senate for approval.
Australian Dollar
AUD hit its lowest level against USD in four months as China commodity prices nosedived. Demand concerns from the Mainland are melting with supply concerns from Australia.
With Mainland interest rates rising and a June US rate hike all but inked, investor sentiment is turning soggy as there’s a chance that policy tightening in the world’s two largest economies could lead to a slowdown in global growth.
China’s liquidity drain to subdue financial risk has seen its short-term interest rates move to a two-year high. With a weak manufacturing PMI, followed by April’s service sector growth coming in at its slowest in nearly a year; 51.2 in, China’s growth concerns amidst rising domestic interest rates is worrying. This toxic combination of higher rates amidst slower growth is clearly weighing on China’s commodity market sentiment.
Also, China’s crackdown on leverage in the attempt to deflate the financial risk bubble is also weighing on futures and other financial product as investors are forced to pair back positions for fear of regulatory reprisal. The knock-on effect has seen China’s financial markets buckle as the dealers and banks scramble for funds.
On the domestic front, Australia’s trade data was also soft: The country’s surplus for March has been reduced to AUD3.11bn, from AUD3.66bn in February which just compounded matters.
While the Aussie remains stubbornly supported above .7400 on little more than a wing and a prayer, let’s see if this morning’s RBA Monetary Policy Statement provides that much needed divine intervention.
In early AUD trade there’s apprehension to drive the Aussie much lower ahead of NFP, but with what’s transpiring in the commodity markets, it’s hard not to remain bearish on the Aussie and the commodity bloc in general.
Japanese Yen
Despite rising US yields, USD/JPY could not make steam above the critical top or drop 113.00 level. Heading into Friday's NFP and Fed speaks with oil prices weighing on risk sentiment, dealers better lighten long dollar inventory. While a Fed flip flop is very unlikely, there is a cocktail of concerns entering the payrolls data where the headline will be noted, but expected to be strong after last month’s massive disappointment. However, dealers are very much keying on the hourly wage growth in the Friday report which has remained stubbornly stagnant.
Bear in mind; the USD/JPY is the most correlated currency pairs linked to Treasury 10y yields, so on a bullish NFP outcome and mildly hawkish delivery from Yellen; the USD/JPY will likely push through 113.00.
Now that the cantankerous French election debate is out of the way and the odds widening for a Macron win, we’re beginning to see some event preposition, but the catalyst came from the most unlikely place. The Italian services PMI, generally an insipid data print, came in well above expectations and fired the euro bulls into action. The market view is still higher EU yields, and the euro scenario provided no weekend surprise. With equity inflow already surging into in EU capital markets, the euro should pop higher next week.